Friday, January 29 2010 — An important shoe dropped this week – this one, a size 15 or more – in the rising and accelerating importance of ESG & Sustainability corporate key performance indicators and related factors to investment management and financial analysis, as well as for corporate senior executives, boards, and management specialists (e.g., investor relations officers, legal counsel, corporate secretaries, ESH managers, marketing officers).

On January 27, 2010 the SEC Commissioners approved an “Interpretive Release” (guidance) on existing disclosure requirements related to business risk on the issue of climate change. (The vote was 3-2 along political party lines.)

Note that despite the scare headlines from some pundits, the SEC did not make statements on, recognize, or endorse positions (pro or con) on climate change. It did not create new legal requirements or modify existing requirements. It did not refine the definitions of materiality to include “climate change” or “global warming.”

The SEC decision, says Chair Mary Schapiro, “…will help public companies in determining what does and does not need to be disclosed…will provide clarity and enhance the consistency of disclosure…the discussions, debates and decisions taking place in the USA and elsewhere on this topic have implications under our existing, long-standing disclosure rules…”

Four critical areas were addressed by the Commission:

The Impact of Legislation and Regulation (disclosure issue: how will these affect the company? Investors? Stakeholders?)

The Impact of International Accords (the EU already has “carbon” regulations; in the USA “Cap & Trade” legislation is being considered by the federal government and a number of states have regulatory regimes; global accords could soon follow – key disclosure issue: how would/do these affect the company? What should investors know?)

Indirect Consequences of Regulation Business Trends (disclosure: what legal, technological, political and scientific developments may create new risks or opportunities for the company? Remember the Chinese symbol for crisis is also for opportunity – leading-edge companies will move ahead with Sustainability disclosure.)

Physical Impacts of Climate Change (disclosure focus: the company should evaluate the actual or potential material impacts of environmental matters on their business. Note that the SEC has mandated certain environmental disclosure over the past 30 years.)
The request to the SEC to consider the guidance for public companies came from investors – Mindy Lubber, president of Ceresand director of the Investor Network on Climate Risk (INCR) led the campaign for broadening climate change-related disclosure by public companies (INCR is a network of 80 institutions with USD$8 trillion AUM). Commenting on the SEC decision, she said:

“Today’s vote is a clarion call about the vast risks and opportunities climate change poses for US companies – and the urgency for integrating into investment decision-making…”

More than a dozen investors managing $1 trillion+ AUM requested the formal guidance along with Ceres and the Environmental Defense Fund in 2007, amplifying the request with supplemental filings in 2008 and again in 2009. (Note: EDF is typical of the “influencers” that we are profiling in INSIGHTS-edge if they are not asset owners or managers or ESG financial researchers or coalitions of investors.)

One of the signatory member institutions is CalPers, the largest state pension fund in the USA ($200+ billion AUM). CEO Anne Stausboll said this about the SEC decision: “We’re glad SEC is stepping up to the plate to protect investors…ensuring that investors are getting timely, material information on climate-related impacts, including regulatory and physical impacts, is absolutely essential…investors have a fundamental right to know which companies are well positioned for the future – and which are not…”

Other shoes dropping – clunk! — In December 2009 the SEC Commission approved new rules to enhance the information that shareowners receive related to risk, executive compensation and corporate governance matters. “Good governance is a system in which those who manage a company – officers and directors – are effectively accountable for their decisions and performance…but accountability is impossible without transparency,” Chairman Schapiro said. The Commission also beefed up rules related to disclosure and information about present and nominated candidates for the board.

Cluck: On September 22, 2009 the US Environmental Protection Agency issued the Final Mandatory Reporting of Greenhouse Gases Rule – this requires annual reporting of GhG emissions by large sources and suppliers in the USA emitting 25,000 metric tons or more per year. ESG and Sustainability aggregators such as Trucost provide these data to analysts, investors, regulators and others. (Gases covered by the Rule include: carbon dioxide, nitrous oxide, hydro fluorocarbons, per fluorocarbons, sulfur hexafluoride, and other gases.) This action followed a US Supreme Court ruling that GhGs are air pollutants covered by the Clean Air Act, which USEPA and the states enforce.

Clunk: On December 7, 2009 the USEPA Administrator signed two finding regarding GhGs – six Greenhouse Gases were determined to threaten public health; and, “well-mixed” GhGs from new motor cars and new engines contribute to GhG pollution which threatens the public health. The latter a prerequisite to finalizing the EPA’s proposed emission standards for light-duty vehicles.

Connecting the dots for you: There is a large and growing universe of Sustainability and ESG (Environmental – Social – Governance key corporate performance indicators) research and advisory organizations that provide analytics and services to asset owners and managers. These organizations are now influencing literally trillions’ of dollars in AUM. A growing number of mainstream investors, including US Public Sector retirement funds, Sovereign Wealth Investors, Sustainable and Responsible Investor (SRI), high-wealth individuals, and others, are adopting ESG and Sustainability investment guidelines.

Recent events underscore the importance of the need for senior corporate management and boards – and especially function managers — to get up-to-speed and ahead of the curve on ESG and Sustainability reporting. The SEC action this week and the previous actions by USEPA will have profound effects on the corporate disclosure – now and in the future. That’s why we developed the Institute’s INSIGHTS-edge as a tool for corporate managers, investment managers, analysts, advocates, and stakeholders.